IPX is a specialized packaging company that packages other manufacturers’ products. Other manufacturers ship their products to IPX in bulk. IPX then packages the products using high- speed, state- of- the- art packaging machines and ships the packaged products to wholesalers. A typical order involves packaging small toys in see- through plastic and cardboard containers.
IPX uses a flexible budget to forecast annual plantwide overhead, which is then allocated to jobs based on machine hours. The annual flexible overhead budget is projected to be $ 6 million of fixed costs and $ 120 per machine hour. The budgeted number of machine hours for the year is 20,000. At the end of the year, 21,000 machine hours were used and actual overhead incurred was $ 9.14 million.
a. Calculate the overhead rate set at the beginning of the year.
b. Calculate the amount of over/ underabsorbed overhead for the year.
c. The company’s policy is to write off any over/ underabsorbed overhead to cost of goods sold. Will net income rise or fall this year when the over/ underabsorbed overhead is written off to cost of goods sold?